Family Wealth Preservation Trust Act
PLICO, or the Physicians Liability Insurance Company of Oklahoma, reports that it insures most of the practicing doctors in Oklahoma. There have been newspaper articles written about its financial strength, which has been questioned of late, and I have visited with physicians who are very concerned about the future of this company, and about their ability to purchase medical malpractice insurance, if PLICO goes out of business. Perhaps for this reason, and Oklahoma’s inability to place a cap on punitive damage lawsuits (or pass meaningful tort reform), the Oklahoma legislature passed an emergency law in 2004 which permits Oklahomans, and out of state persons, to shelter one million dollars from creditors claims (this has been amended, and the amount is unlimited in amount). The legislation is known as the Family Wealth Preservation Trust Act.
I serve on the State Bar Association Committee which deals with some legislative issues, and we were alerted that this legislation was going be adopted. As it was explained to us, the legislature wanted to create an incentive for out of state investors to invest in Oklahoma assets, such as stocks, bonds, debentures issued by an Oklahoma company, Oklahoma State or Local Municipal Bonds, accounts in Oklahoma based banks and Oklahoma real estate. We were told that once assets were placed in a preservation trust, creditors could not seize the assets, as a means of satisfying judgments.
After June 9, 2004, when the law went into effect, there were several seminars held, and through these seminars, I learned that the FWPTA was actually an extension of the homestead statutes. In other words, investors in California, Florida, Maine, or wherever, would be protected from creditors only if they were residents of Oklahoma (Oklahoma homestead statutes, which are outlined in Title 31 of the Oklahoma Statutes, only protect Oklahoma citizens). Because of this, it appears the legislation was doing very little towards luring out of state investors to invest in Oklahoma assets. It appears the only ones to benefit from this law are citizens of the state of Oklahoma.
This leads me back to my initial point, and that is, doctors are permitted to use this legislation to shelter one million dollars in assets from creditors claims (or two million if the physician is married and his wife establishes such a trust). In a sense, FWPTA is an indirect means of tort reform.
The unique aspect of the Oklahoma law is that FWPTA trusts can be revocable or irrevocable. Regardless of whether the trust can be changed or not, it appears such a trust would be a grantor trust under the Internal Revenue Code, and income would be taxed to the grantor.
The trustee of one of these trusts must be a bank or trust company, either chartered in Oklahoma, or Federally chartered with a physical location in Oklahoma. An out of state federally chartered trust company could serve as trustee, but there is a requirement that the trustee have a physical location in Oklahoma.
The beneficiaries under such a trust are limited to the Grantor’s spouse, the natural children of the grantor, adopted children of the grantor if they were under age 18 when the trust was created, grandchildren of the grantor, issue of deceased natural children or grandchildren of the grantor, or nonprofit charitable organizations organized under Section 501(c)(3) of the Internal Revenue Code. These beneficiaries are known as “qualified beneficiaries” (and these “qualified beneficiaries” are not to be confused with qualified beneficiaries, as that term is defined under the Uniform Trust Code).
The corpus of the trust must consist only of Oklahoma assets, which are stocks, bonds, or debentures issued by an Oklahoma based company, Oklahoma State or Local Municipal Bonds or other obligations, accounts in Oklahoma based banks, and Oklahoma real estate. There are many questions about this list of assets: presumably, an Oklahoma company could be formed (which would qualify as an Oklahoma based company), and then own assets which are physically located outside Oklahoma. That same company could invest in securities (stocks or bonds) from other states, but because the assets are owned by an Oklahoma based company, the nature of the assets would not matter: the company qualifies under the FWPTA.
Preservation trusts may be funded with up to one million dollars in assets, which then become “exempt from attachment or execution and every other species of forced sale, and no judgment, decree or execution can be a lien on the trust for the payment of the debts of the grantor”. If the assets grow in value, above one million dollars, the incremental growth is also protected from judgments.
Transfers of assets into a preservation trust are subject to the fraudulent transfer rules, which means that these trusts will not protect a person who would become insolvent after transferring property to the trust.
Presumably all of these trusts will be revocable trusts; however, the statute specifically provides that no court or judicial body shall have the power to revoke the trust. Thus, the grantor would always have the right to revoke the trust.
There are many questions that are being raised about these trusts, but in a sense, it is a vehicle which gives some backdoor tort relief to physicians (and others who want to shelter assets from judgment creditors). Here is a re-print of the legislation:
Family Wealth Preservation Trust Act
31 O. S. §10-18
SECTION 10. This act shall be know and may be cited as the “Family Wealth Preservation Trust Act”.
SECTON 11. As used in the Family Wealth Preservation Trust Act:
1. “Grantor” means an individual establishing or creating a preservation trust;
2. “Oklahoma assets” means:
a. a stock, bond, or debentures issued by an Oklahoma- based company,
b. a bond or other obligation issued by the State of Oklahoma or an Oklahoma governmental agency,
c. a bond or other obligation issued by a country of this state o by a municipal government located in this state,
d. an account in an Oklahoma-based bank. As used in this subparagraph, “account” means a demand, time, savings or passbook type of account or a certificate of deposit type of account, and
e. real property located in the State of Oklahoma;
3. “Oklahoma-based bank” or “Oklahoma-based trust company” means a bank or a trust company chartered under the laws of this state or nationally chartered and having a place of business in Oklahoma, which place of business shall be a physical location;
4. “Oklahoma-based company” means a corporation, limited liability company, limited partnership, or limited liability partnership formed or domesticated in Oklahoma and having its principal place of business in Oklahoma, which principal place of business shall be a physical location.
5. “Preservation trust” means a trust:
a. established by a grantor under Oklahoma law,
b. having at all times as the trustee an Oklahoma-based bank that maintains a trust department or an Oklahoma-based trust company.
c. Naming as beneficiaries only qualified beneficiaries or a qualified beneficiary,
d. having as its corpus solely Oklahoma assets, and
e. reciting in its terms that the income generated from the corpus of the trust is subject to taxation under the income tax laws of the State of Oklahoma; and
6. “Qualified beneficiary” or qualified beneficiaries” mean;
a. the natural children, adopted children if they were under the age of eighteen (18) at the time of the creation of the preservation trust, grandchildren, or issue of deceased natural children or grandchildren of the grantor,
b. The spouse of the grantor, or
c. a nonprofit organization qualified under the provisions of the Internal Revenue Code of 1986, 26 U.S.C., Section 501 (c)(3).
SECTION 12. Notwithstanding Section 3 of this title and Section 299.15 of Title 60 of the Oklahoma Statutes, the corpus and income of a preservation trust shall be exempt from attachment or execution and every other species of forced sale and no judgment, decree, or execution can be a lien on the trust for the payment of debts of a grantor, except a child support judgment. Any incremental growth derived from income or an increase in value of the corpus of a preservation trust shall also be considered protected by this section. Transfer of an asset to a preservation trust does not affect any mortgage, security interest or lien to which that asset is subject.
SECTION 13. A preservation trust may be established as a revocable or irrevocable trust. If the grantor of a preservation trust revokes the preservation trust the exemption provisions of Section 3 of this act shall not be applicable on the date the grantor revokes the preservation trust.
SECTION 14. The exemption provided for pursuant to other provisions of the laws of this state shall be independent and in addition to the exemption provided for pursuant to Section 3 of this act.
SECTION 15. The provisions of the Family Wealth Preservation Trust Act shall not operate to increase the area and value of the homestead exemption provided for pursuant to Section 2 of Title 31 of the Oklahoma Statutes.
SECTION 16. No court or other judicial body shall have the authority to compel a person holding a power of revocation over a preservation trust to exercise the revocation.
A. Any transfer of monies or property by a grantor to a preservation trust shall be subject to the provisions of the Uniform Fraudulent Transfer Act.
B. A transfer of monies or property into a preservation trust by a grantor within three (3) years of the grantor filing for protection under the United States Bankruptcy Code, 11 U.S.C., Section 101 et seq. shall be presumed to be a fraudulent conveyance. This presumption shall not be applicable in the event of an involuntary bankruptcy proceeding being commenced against the grantor.
SECTION 18. A grantor may not establish more than one preservation trust. However, in the event a preservation trust established by a grantor is revoked or terminated, the grantor may establish a new preservation trust.